CEO Succession: The Case at Ford
When Ford Motor Company looked to replace Bill Ford as CEO, it turned not to another auto industry insider but instead to Boeing's Alan Mulally. We talk with Harvard Business School professor Joseph L. Bower to better understand Ford's move and the larger issues of CEO succession. Key concepts include:
- New CEOs are often plucked from outside the company—about a third of the time for S&P 500 companies.
- Industry knowledge isn't a specific determinant of a new CEO's success, but knowledge of the business is crucial—see Lou Gerstner at IBM.
- Companies need to plan CEO succession ten years in advance—not react to an immediate situation.
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In early September, Ford Motor Company announced that Bill Ford would be replaced as CEO by Boeing's Alan Mulally, credited with the turnaround of the Commercial Airplanes division of The Boeing Company. (Ford will remain the company's executive chairman.)
Harvard Business School professor Joseph L. Bower, the Donald Kirk David Professor of Business Administration, is an expert on corporate strategy, organization, and leadership. He discusses the Ford move, along with the larger issue of CEO succession, with Jim Aisner, Director of Media Relations at Harvard Business School.
Jim Aisner: With me today is Harvard Business School professor Joseph Bower, an expert on corporate strategy and leadership. His most recent research focuses on CEO succession. Joe, thanks for coming in.
Joseph Bower: My pleasure, Jim.
Q: Now, Bill Ford has just put the brakes on his ride as CEO of Ford Motor Company and handed the wheel over to Alan Mulally, who's a veteran of Boeing. How common is it these days, Joe, for companies to turn to outsiders for the CEO chair?
A: Actually, it's pretty common—about a third of the time for the companies [in the] S&P 500, and about 40 percent when the company's had some problems. So you have to say frequently.
Q: What are the advantages of doing that?
A: The main advantage is that you can probably get a fresh point of view. You also get board support. If you think about it, turning outside means the board has lost confidence in the insiders. And at least as long as there is some success, the terrific advantage is that the leader has the support of the board. In some instances, you also get someone who knows a lot about the business.
Q: I guess in some instances you get someone who doesn't know a lot about the business. Is that another problem?
A: Well, there are two different approaches. What's interesting is sometimes people go for great CEOs who come from what are called CEO factories, like GE or Procter & Gamble. Interestingly, a group of companies that has a very good record … which are the LBOs, almost never go for that sort of CEO. They look for an industry figure who really knows a lot about the business and that company—often a retired CEO.
Q: Is it easy to predict who's going to be the next Lou Gerstner, who did such a great job at IBM, versus Carly Fiorina, who had problems at Hewlett Packard?
Mulally has a terrific record in managing a manufacturing or assembly manufacturing business.
A: Well, I've already touched on a key element, and that is how much do they know about the business? Gerstner was always talked about as a McKinsey man who'd been at a tobacco company. But in fact, at American Express, where he had a significant run, he was running the largest customer for computers perhaps in the world, the American Express travel business. And it was based on that understanding, from a customer's perspective of what the customer needed, that he was able to really make a quite critical decision at IBM, which was to stay as a vertically-integrated company.
Q: Now, as they say in Detroit, Mulally is not a car guy. So what does he bring to the table?
A: Well, he has a terrific record in managing a manufacturing or assembly manufacturing business. The 777 is a tremendous, terrific airplane. And he's got a record of performing and delivering and cutting costs under very difficult circumstances. So he seems to be quite an unusual guy, and at least, judging from the press, has a very extensive reputation.
Q: Going back to the way this all transpired with Bill Ford. Bill Ford seems to have played a rather major role in picking Mulally as successor. Is that OK, or is it better for the CEO to sort of stay in the kitchen when this is taking place?
A: Well, it's hard for the owner to stay out of the kitchen, and Bill Ford's not just the CEO, he's the owner. In that sense it's very important that the ownership of the company pick the new manager. Apparently he lost faith in the insiders, and interestingly, he conducted his own search. We don't read about any of the major search firms being involved in this transaction. So it's very much an owner saying, "I'm not doing this job well, I'm going to find someone who can do it right."
Q: You've been doing a lot of work recently I know, Joe, on succession planning and the CEO succession in general. According to your research, what do you think is the best way to go about this?
A: I don't want to be frivolous in what I'm about to say, but you begin twenty years earlier and you develop a cadre of outstanding people who can do a really good job. You can't develop great CEOs overnight. It takes a lot of time. Maybe it's not twenty, but it's ten anyway. And you also have to have a company that's making good products.
Q: Does it strike you as sort of strange that at some point, apparently during the summer, Bill Ford says, "There's too much for me to do here, guys, I need to find someone else." It looks like there's been about a month in the planning here, whatever, rather than even a few years.
A: My impression is that they've been looking for leadership a long time, and they've had a lot of problems finding people to work at the top of Ford. So it's not really a month. This particular move may have developed over a month as he decided he needed help, decided he had to find that help outside the company.
Q: And then looked to some strong board members to help him.
A: Right, to get help. That's exactly what the board's there for, to help the CEO in time of crisis, and particularly around succession. That's where you earn your board fees.
Q: Let me ask you one more question, and that is, putting on your expert strategist hat, Ford Motor Company's in trouble. It's losing a lot of money, in particular in North America. What's the most important thing it has to do to get back in the race, as it were, with a successful company like Toyota?
A: It has to make good cars. Basically, Ford has been holding its position on the basis of SUVs and the pick-up.
A: Trucks, you could say. And really, Toyota, the Camry, just pushed the Mercury and the Taurus right out of the business, and Lexus took Lincoln down. And that takes you back into a decade anyway they've been in bad shape in the car business. They've got to rebuild their position in cars, and to do that they have to make great products. And they haven't done that in a while, and the consumer's on it.
Q: And I assume it's going to take a long—a certain amount of time, for them to start making great products again?
A: I would guess so. I'm not a car person, but yes. I think that's probably what appealed to them about Mulally because everybody was singing the praises of Airbus and then, five years later, Boeing has recaptured its leadership. So I'm sure that's the dream that they have at Ford.
Q: Well, we'll be watching and perhaps talking to you again about all this. Thanks for coming in.
A: It's a pleasure.